The IRS updated its Fact Sheet for states and local governments on taxability and reporting of payments from Coronavirus State and Local Fiscal Recovery (SLRF) Funds.[1] The update added questions 15-17 to the existing FAQ, with the new questions dealing with assistance paid to individuals related to purchases of a home and payment of premium mortgage insurance.

Tax Impact on Recipient of Funds Used to Pay Some or All Closing Costs and Down Payment

The first question deals with the tax impact of the receipt by an individual of SLRF funds related to the purchase of a home, resolving the issue by looking at IRC §139.

Q15: I am an individual and my state/local government is using SLFR Funds to pay some or all of the down payment and closing costs associated with my purchase of a home under a program to support those negatively impacted by the COVID-19 pandemic. If I receive such assistance under this program, must I include it in my gross income? (added September 28, 2022)

A15: No, the amount of this assistance is not included in gross income. These payments using SLFR Funds are made by a state/local government to individuals to promote the general welfare of qualifying individuals who are negatively impacted by the COVID-19 pandemic, a qualified disaster. As such, they are considered qualified disaster relief payments under section 139 of the Code and are excluded from gross income. However, payments made to or for the benefit of an individual are not treated as qualified disaster relief payments to the extent the expense of the individual compensated by such payment is otherwise compensated for by insurance or otherwise. See section 139(b).[2]

Impact on Deduction if Funds Used to Pay Premium Mortgage Insurance (PMI)

The next question deals with whether a taxpayer who receives these funds to pay otherwise deductible premium mortgage insurance (PMI) must forfeit the deduction for amounts paid with the SLFR assistance:

Q16: I am an individual and my state/local government is using SLFR Funds to pay some or all of the premium mortgage insurance (PMI) with my purchase of a home. If I receive such assistance under this program, can I deduct the PMI costs paid through this program? (added September 28, 2022)

A16: No, the PMI costs are not deductible for the individual. An individual cannot take a deduction or credit for expenses that are excluded under section 139. See section 139(h).[3]

State and Local Government Information Reporting Related to SLFR Funds Used for Home Purchases

The final added question deals with whether state and local governments must file information returns (such as Forms 1099) with the IRS related to such payments and provide copies to the recipients of the payments:

Q17: We are a state/local government using SLFR Funds to pay some or all of the down payment and closing costs associated with individuals' purchases of homes. Do we have an obligation to file a Form 1099 or other information return with respect to these payments? (added September 28, 2022)

A17: No. A Form 1099-MISC reporting the payment would be required if the payment constituted income to the recipient. In this case, because the payment is not income, no Form 1099-MISC or other information return is required to be filed with the IRS or furnished to the recipient.[4]

[1] “IRS updates frequently asked questions for states and local governments on taxability and reporting of payments from Coronavirus State and Local Fiscal Recovery Funds,” FS-2022-36, September 28, 2022, https://www.irs.gov/newsroom/irs-updates-frequently-asked-questions-for-states-and-local-governments-on-taxability-and-reporting-of-payments-from-coronavirus-state-and-local-fiscal-recovery-funds (retrieved September 30, 2022)

[2] “IRS updates frequently asked questions for states and local governments on taxability and reporting of payments from Coronavirus State and Local Fiscal Recovery Funds,” FS-2022-36, September 28, 2022

[3] “IRS updates frequently asked questions for states and local governments on taxability and reporting of payments from Coronavirus State and Local Fiscal Recovery Funds,” FS-2022-36, September 28, 2022

[4] “IRS updates frequently asked questions for states and local governments on taxability and reporting of payments from Coronavirus State and Local Fiscal Recovery Funds,” FS-2022-36, September 28, 2022